Opinion: Canada’s next big step in sustainable finance – let’s get good disclosure
Jim Leech is a Member of the Order of Canada and the Order of Ontario, Chancellor Emeritus of Queen’s University, and past President and CEO of the Ontario Teachers’ Pension Plan. He is currently Chairman of the Advisory Board of the Institute for Sustainable Finance.
Sean Cleary is Professor of Finance, Founding Director of the Masters of Finance Program at the Smith School of Business at Queen’s University, and President of the Institute for Sustainable Finance.
Right now, experts are considering a decision that will affect not only Canada’s regulatory landscape, but the country’s future competitiveness as well. This includes the ability of our businesses to attract global capital and manage the risks and opportunities of the transition to a net zero world. That decision is whether and how we make the disclosure of material climate-related data mandatory.
In October, the Canadian Securities Administrators (CSA) announced proposed new rules for climate-related disclosures by companies, joining a growing movement in environmental, social and governance (ESG) criteria that has recently seen similar developments in Britain, the European Union and other jurisdictions. With the deadline for comments on the CSA proposal in a few weeks, the window to shape Canada’s trajectory on this issue closes. We applaud this important initiative, which we see as a decisive step in the right direction. We fully expect (and hope) that this will be the start of an evolutionary journey to demand improved and critical disclosures on sustainability issues. We have a tremendous chance to get it right from the start, but loopholes in the proposed rules could cost us that opportunity.
With ESG issues and the effects of climate change increasingly accepted as falling within the scope of fiduciary duty, better disclosures are no longer a pleasant thing, but a necessity. A growing chorus of voices made it clear. Take the rare joint call for better disclosure by Canada’s eight largest pension funds, collectively responsible for more than $ 1.6 trillion in assets. Last summer, the country’s 10 largest pension funds issued a similar joint statement in response to the U.S. Securities and Exchange Commission request for contribution.
The CSA proposal is part of this dynamic. We applaud the elements that will improve the completeness, consistency and comparability of climate-related financial information, including the implementation of a significant part of the recommendations of the Working Group on Climate-Related Financial Information (TCFD). Making these disclosures a regulatory requirement in Canada is essential to achieving these goals, and we must act quickly.
That said, there are three key areas where the proposed requirements fall short.
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First, the decision to exclude the analysis of climate scenarios is a significant missed opportunity. Scenario analysis is a fundamental component of identifying a company’s exposure to climate risk. The process conforms to TCFD requirements, which are quickly becoming global standards. Excluding this requirement limits the ability of capital providers to fully analyze the impact of climate change, putting Canadian companies at a global disadvantage. In the absence of such information, capital providers often err on the side of caution and take a pessimistic view of the risks and opportunities facing a particular business.
We recognize that scenario analysis could be complicated for companies and we would not want this to hinder the timely implementation of CSA recommendations. A phased approach to this requirement would be a reasonable compromise.
Second, we strongly disagree with the idea of ââoffering emitters the option of not disclosing their greenhouse gas emissions as long as they can provide an explanation for doing so. Many companies currently disclose their shows in Canada. In other jurisdictions, such as the EU and Great Britain, a much higher percentage of companies do so. This information is essential for capital distributors, regulators and businesses themselves as we move to a net zero economy by 2050.
For companies, not having a starting point to measure emissions is inexcusable and seriously hinders the development of legitimate transition plans. The lack of availability of this information complicates data problems for regulators and capital distributors as they plan their own net zero transition strategies. It is important to note that once companies start reporting their GHG emissions, they take action to reduce them.
Third, while the TCFD reporting requirements are comprehensive with respect to climate-related issues, the Sustainability Accounting Standards Board (SASB) framework compliant reporting is highly complementary, as it provides more detailed information on other critical ESG issues. The strong demand for TCFD and SASB reports is evident in the joint statements of Canada’s largest pension plans, which called for disclosures aligned with the two frameworks. This is also evident in the proxy voting policies of many large global institutional investors. Similar to the implementation of scenario analysis disclosures, a phased approach makes sense when it comes to SASB disclosures.
The global market places increasing value on climate solutions and resilience, as well as progress and business plans to address important social and governance issues. At the same time, he punishes those who fail to prove that they are up to the task. For Canadian businesses to be competitive, strong and credible reporting is essential. Implementing the CSA proposal will help Canadian businesses, capital providers and policymakers meet this challenge. But tackling the gaps first would greatly increase the impact. The climate-related disclosure requirement is a fundamental step in Canada’s journey to prosper through the massive economic transition that is already well underway. Let’s do this step correctly.
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